Gas prices in Indianapolis are high right now. Purdue professor explains why

Crude oil and gasoline prices are on the rise after President Donald Trump withdrew from the Iran nuclear deal. Now, many consumers are seeing their extra money go to rising gas prices, potentially undercutting a key pillar of economic growth this year.
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Gas prices are posted at the Speedway Gas Station located at 401 S. Kentucky Ave. in Indianapolis on Thursday, May 10, 2018.(Photo: Michelle Pemberton/IndyStar)Buy Photo

Just in time for the summer travel season, the cost of gasoline is headed up — and Hoosier drivers could be in for some of the highest prices in at least four years.

A combination of factors is expected to contribute to a summertime price jump of 40 to 50 cents a gallon, according to Wally Tyner, an energy economist and the James and Lois Ackerman Professor of Agricultural Economics at Purdue University.

Why gas prices went up

Summer price increases are not unexpected, Tyner said, due to increased demand as folks hit the road for vacations and the added cost refiners pass along to consumers for a hot-weather blend of fuel needed to meet EPA standards. The switch to a "summer" blend, which has more of the volatile elements removed so they don’t evaporate into the air during the hot months, typically pushes up the cost to consumers by about 5 cents a gallon, Tyner said.

But this year, according to Tyner, that bump could be magnified. That's due to a growing demand for petroleum fueled by strong economies around the globe and reductions in crude oil supplied from OPEC, Russia and Venezuela.

“Everything in economics,” he explained, “is a matter of supply and demand.”

The world’s growing thirst for petroleum has helped drive the cost of crude oil from about $50 a barrel in November to around $70 in May. Tyner said that pump prices increase about 5 cents per gallon for every $2 jump in the price of crude — or about 50 cents since November.

Will gas prices go down?

Tyner said it is impossible to predict long-term prices, but added sanctions announced last week against Iran could also add to the price increase. He expects the higher prices to linger at least through the summer, and possibly into the fall. But Tyner explained the lure of higher prices and more profits could prompt some OPEC members and other producers to break ranks and increase the supply of crude, which could help temper prices.

Hoosier motorists are already heading into the summer with the highest average gas prices since the summer of 2014, according to Greg Sieter of AAA Hoosier Motor Club. The statewide average last week for a gallon of regular gasoline was $2.82 compared to $2.17 a year ago.

“Heading into the busy driving season,” Sieter said, “prices are certainly much higher than in recent years. And that doesn’t bode well for the rest of summer.”

Gas prices have been much higher

Motorists may groan at paying more for a fill-up this summer, but Sieter said it could be worse.

“While prices may not be close to where we’d like them to be,” he said, “they are nowhere near the record high.”

That dark day was May 4, 2011, when the statewide average hit a record high of $4.25.

So far, Sieter said, there’s no indication the higher prices will prompt significant travel cutbacks. In fact, he explained, Hoosiers see more significant price variations than drivers in most other parts of the U.S.

“In what we call the Great Lakes region (Indiana, Illinois, Michigan, Ohio and Kentucky),” he said, “we’ve grown accustomed to those big swings.”

Sieter said the regional price roller coaster is connected to our geographic location and the difficulty of getting refined petroleum to the Midwest. Indiana prices also are more closely linked to production at a few Midwest refineries, including one in Whiting.

“Any time there is a problem at one of those refineries,” he said, “it dramatically affects us due to our proximity.”

Tim Evans is IndyStar's consumer reporter. Contact him at (317) 444-6204 or tim.evans@indystar.com. And follow him on Twitter: @starwatchtim